Analyzing Amazon’s Move to Get Physical

Article Published by Ivey Business Journal

Amazon is going back to the future, launching a brick-and-mortar grocery store as part of a strategy aimed at expanding its small physical retail presence. But this is no ordinary grocery store. Scheduled to open in 2017, the Amazon Go test concept will allow Seattle customers to shop without lining up or checking out. Thanks to the magic of a smartphone app and advanced technology, shoppers will just walk out after grabbing items they want off store shelves. The company charges departing goods to Amazon Go accounts as customers leave, then it issues an electronic receipt.

Amazon Go is a major step for the e-commerce giant, in both pursuing brick-and-mortar retail and advancing “computer vision and machine learning to create a shopping experience with no lines and no checkout.” The absence of checkout lanes and cashiers at Amazon Go stores–which could eventually number in the thousands if all goes well–has captured plenty of media attention. But what’s more important for e-commerce merchants is understanding Amazon’s motives for opening a retail space, not to mention its widely reported plans to pursue other experimental retail formats.

A DRIVER OF GROWTH IN NEW MARKET SEGMENTS

Amazon has long established its dominance in the e-commerce space, so it’s no surprise that it might target other forms of retail sales as a method of diversification and growth. A physical store is a market mostly untouched by Amazon thus far. That means the company has a powerful opportunity to make a first impression with the advantage of already having positive and long-lasting e-commerce relationships with plenty of customers.

Amazon may also be considering practical matters. A physical Amazon store could provide online customers with an easy and convenient option to return their purchases in-store. Both Amazon and its customers would benefit from the added convenience. Staff would handle some of the work related to returns, such as completing forms, packaging, and generating labels. Encouraging returns to a central location also provides Amazon with a major efficiency: high-volume shipping of returned items significantly reduces shipping costs associated with the current model of individual customers making their returns from a wide variety of locations.

Customers also benefit from these efficiencies. Instead of being limited to a dedicated trip to the nearest post office or courier location, customers can combine errands, returning their item to Amazon while out grocery shopping or making other purchases. This is an alluring prospect for many customers who want to save time. In addition, returning products in-store places customers in another shopping experience, saving time for customers who have other purchases to consider and providing them with an opportunity for unplanned purchases.

The addition of in-store returns also creates another opportunity for Amazon to be in touch with its customers. In the current model of individual returns by post or courier, a customer’s contact is not with Amazon staff, but with the postal or courier clerk. But an in-store return creates a touchpoint with customers. Amazon staff have the opportunity to inspect the item and ensure it is suitable for return, but more importantly, they can explore why the customer was unhappy with the item, creating an opportunity to suggest alternative purchases or upsell.

TAPPING INTO THE COMMON DESIRE FOR IN-STORE SHOPPING

A few statistics from A.T. Kearney’s study on brick-and-mortar shopping demonstrate the value of physical storefronts for all types of merchants: 90 percent of all retail sales occur in stores, and just 5 percent of retail sales are transacted exclusively online through stores without any brick-and-mortar presence. While e-commerce has captured a growing share of the overall retail pie with each passing year, there’s still an overwhelming preference among consumers to visit stores. A.T. Kearney cited the sensory experience and ability to interact with goods before purchasing them as major drivers of this sentiment—two things Amazon can achieve with physical locations.

Amazon already has a strong reputation with consumers, and brick-and-mortar stores can strengthen that perception. Exactly how the company will act on that opportunity isn’t clear, but Amazon has many chances to innovate in a new area of commerce. It could offer more diverse, or simply more, options than competitors in the local area, and develop new and engaging marketing techniques that appeal to customers—two things Amazon already does after a fashion in its e-commerce operations. The company has already been innovative with logistics, introducing Amazon’s self-service pick-up stations (Amazon Locker) and local delivery of items from a variety of stores and restaurants (Prime Now). Amazon Echo, a voice-activated smart-device control, and Amazon Dash, a consumer goods reordering service, have improved customer engagement and, not to anyone’s surprise, increased Amazon’s sales.

With its decision to eliminate cashiers and checkout lines in its physical stores, Amazon has an opportunity to apply to the physical retail world what shoppers like best about buying from the company: stored payment information, easy product choice, one-click purchasing, and generally speedy transactions. The use of RFID (radio frequency identification) smart labels, cameras, and other technology to track purchases and debit customers can significantly decrease the time spent shopping, creating an attractive shopping experience by mixing the best of both retail worlds.

MORE POWERFUL TECHNOLOGICAL INNOVATION

Amazon’s decision to enter the world of physical retail brings with it a process not duplicated in any other existing retail atmosphere. Its ability to target consumer preferences and offer experiences that tap into those preferences is well-known. The company’s self-proclaimed commitment to advance computer vision and machine learning suggests that the e-commerce giant is eyeing a large-scale rollout of a new form of shopping that’s desirable to many of its customers. The goal of a faster checkout process isn’t yet proven, but it is promising.

Amazon already has plenty of data about its customers, and its collection of useful and actionable information grows every second. Introducing a physical sales channel adds another dimension to this strategy. Even more important is the ability for all of Amazon’s commerce channels to interact and understand each customer individually, sharing information about purchases made in each of multiple channels to develop the most complete and useful picture of the customer possible.

Beacons—in-store apps that connect with the customer’s smartphone to make fine-tuned offers and suggestions—and hyperspecialization—understanding exactly what the customer is looking for, based on what she has bought in the past—are also intriguing considerations. Amazon already has the perfect technology in place to allow beaconing to drive the company’s brick-and-mortar success. Beaconing works on data analytics and Amazon has the massive amounts of data it needs to set relevant rules and connect the dots in ways that entice consumers. If Amazon can draw on customers’ purchasing history, demographic information, and other elements, and combine it with beaconing when the customer enters a retail location, those stores will offer a new and immersive type of marketing and engagement that few, if any, competitors can yet match.

Coming from the realm of e-commerce, there’s the risk that Amazon will miss a few key tactics as it integrates its online world with the physical world. That said, this company continues to amaze us with its innovative disruptions. Amazon Go is just the latest in a continuing cycle of improving customer experiences.

Sam Cinquegrani

Founder and Chief Executive Officer

ObjectWave is a full-service provider of digital commerce solutions. He can be reached at [email protected].

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